Question

Head-First Company plans to sell 4,400 bicycle helmets at $84 each in the coming year. Unit variable cost is $50.40 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is $19,000 and fixed selling and administrative expense is $30,300.

	Required:
1.	Calculate the variable cost ratio.
2.	Calculate the contribution margin ratio.
3.	Prepare a contribution margin income statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable cost, and total contribution margin.

Answer 1

	Particulars	Amount ($)
1	Variable cost ratio
	Variable cost	50.4
	Selling price	84
	Variable cost ratio = Variable cost/Selling price	60.0%
2	Contribution margin ratio
	Variable cost	50.4
	Selling price	84
	Contribution (Selling price-Variable cost)	33.6
	Contribution margin ratio (Contribution/Sales)	40%

3	Contribution margin Income statement
	Particulars	Units	Amount ($)	Total	% of sales
	Selling price	4400	84	369600	100.00%
	Variable cost	4400	50.4	221760	60.00%
	Contribution	4400	33.6	147840	40.00%
	Fixed factory overheads			19000	5.14%
	Fixed selling expenses			30300	8.20%
	Total fixed overheads			49300	13.34%
	Net profit			98540	26.66%